The President:
Thank you very much. Since taking office, my
administration has mounted what I think has to be acknowledged
as an extraordinary response to a historic economic crisis. But even as we take decisive
action to repair the damage to our economy, we’re working hard
to build a new foundation for sustained economic growth. This will not be easy. We know that this recession is
not the result of one failure, but of many. And many of the toughest
challenges we face are the product of a cascade of mistakes
and missed opportunities which took place over the
course of decades. That’s why, as part of
this new foundation, we’re seeking to build an energy
economy that creates new jobs and new businesses to free us
from our dependence on foreign oil. We want to foster an education
system that instills in each generation the capacity to
turn ideas into innovations, innovations into
industries and jobs. And as I discussed on Monday
at the American Medical Association, we want to reform
our health care system so that we can remain healthy
and competitive. This new foundation
also requires strong, vibrant financial markets,
operating under transparent, fairly-administered rules of
the road that protect America’s consumers and our economy from
the devastating breakdown that we’ve witnessed in recent years. It is an indisputable fact that
one of the most significant contributors to our economic
downturn was a unraveling of major financial institutions and
the lack of adequate regulatory structures to prevent
abuse and excess. A culture of irresponsibility
took root from Wall Street to Washington to Main Street. And regulatory regime basically crafted in the wake of a 20th century economic crisis
— the Great Depression — was overwhelmed by
the speed, scope, and sophistication of a
21st century global economy. In recent years,
financial innovators, seeking an edge in
the marketplace, produced a huge variety of
new and complex financial instruments. And these products, such
as asset-based securities, were designed to spread risk,
but unfortunately ended up concentrating risk. Loans were sold to banks, banks
packaged these loans into securities, investors bought
these securities often with little insight into the risks
to which they were exposed. And it was easy money
— while it lasted. But these schemes were
built on a pile of sand. And as the appetite for
these products grew, lenders lowered standards
to attract new borrowers. Many Americans bought homes and
borrowed money without being adequately informed
of the terms, and often without accepting
the responsibilities. Meanwhile, executive
compensation — unmoored from long-term
performance or even reality — rewarded recklessness
rather than responsibility. And this wasn’t just the
failure of individuals; this was a failure
of the entire system. The actions of many
firms escaped scrutiny. In some cases, the dealings
of these institutions were so complex and opaque that few
inside or outside these companies understood
what was happening. Where there were
gaps in the rules, regulators lacked the
authority to take action. Where there were overlaps,
regulators lacked accountability for their inaction. An absence of oversight
engendered systematic, and systemic, abuse. Instead of reducing risk, the
markets actually magnified risks that were being taken by
ordinary families and large firms alike. There was far too much debt and
not nearly enough capital in the system. And a growing economy
bred complacency. Now, we all know the result: the
bursting of a debt-based bubble; the failure of several of the
world’s largest financial institutions; the sudden
decline in available credit; the deterioration
of the economy; the unprecedented intervention
of the federal government to stabilize the financial markets
and prevent a wider collapse; and most importantly, the
terrible pain in the lives of ordinary Americans. And there are retirees who’ve
lost much of their life savings, families devastated
by job losses, small businesses forced
to shut their doors. Millions of Americans who’ve
worked hard and behaved responsibly have seen their
life dreams eroded by the irresponsibility of others
and by the failure of their government to provide
adequate oversight. Our entire economy has been
undermined by that failure. So the question is,
what do we do now? We did not choose how
this crisis began, but we do have a choice in
the legacy this crisis leaves behind. So today, my administration is
proposing a sweeping overhaul of the financial regulatory system,
a transformation on a scale not seen since the reforms that
followed the Great Depression. These proposals reflect
intensive consultation with leaders in Congress, including
those who are here today: Chairman Dodd and
Chairman Frank, who, along with Senator Shelby
and Representative Bachus, will be meeting with me
throughout this process. They met with me earlier this
year to jumpstart the discussion of reform. These reforms are also
drawing on conversations with regulators, including those
I met with this morning, as well as consumer advocates
and business leaders, academic experts, and
the broader public. In these efforts, we
seek a careful balance. I’ve always been a strong
believer in the power of the free market. It has been and will remain the
engine of America’s progress — the source of prosperity
that’s unrivaled in history. I believe that jobs are best
created not by government, but by businesses and
entrepreneurs who are willing to take a risk on a good idea. I believe that our role is
not to disparage wealth, but to expand its reach;
not to stifle the market, but to strengthen its ability
to unleash the creativity and innovation that still make this
nation the envy of the world. That’s our goal — to restore markets in which we reward hard work and responsibility
and innovation, not recklessness and
greed; in which honest, vigorous competition
is the system — in the system is prized, and
those who game the system are thwarted. With the reforms
we’re proposing today, we seek to put in place rules
that will allow our markets to promote innovation while
discouraging abuse. We seek to create a framework
in which markets can function freely and fairly, without
the fragility in which normal business cycles suddenly bring
the risk of financial collapse; we want a system that works
for businesses and consumers. There are those who will say
that we do not go far enough, that we should have scrapped the
system altogether and started all over again. I think that would be a mistake. Instead, we’ve crafted reforms
to pinpoint the structural weaknesses that allowed for this
crisis and to make sure that these problems are dealt with so
that we’re preventing crises in the future. There are also those who say
that we are going too far. But the events of the past few
years offer ample testimony for the need to make
significant changes. The absence of a working
regulatory regime over many parts of the financial system — and over the system as a whole — led us to near catastrophe. We shouldn’t forget that. We don’t want to
stifle innovation. But I’m convinced that by
setting out clear rules of the road and ensuring transparency
and fair dealing, we will actually promote
a more vibrant market. This principle is at the heart
of the changes we’re proposing, so let me list them for you. First, we’re proposing a set of
reforms to require regulators to look not only at the safety
and soundness of individual institutions, but also
— for the first time — at the stability of the
financial system as a whole. One of the reasons this crisis
could take place is that while many agencies and regulators
were responsible for overseeing individual financial firms
and their subsidiaries, no one was responsible for
protecting the whole system from the kinds of risks that tied
these firms to one another. Regulators were charged
with seeing the trees, but not the forest. And even then, some firms that
posed a so-called “systemic risk” were not regulated
as strongly as others; they behaved like banks but
chose to be regulated as insurance companies,
or investment firms, or other entities that
were under less scrutiny. As a result, the failure of one
firm threatened the viability of many others. The effect multiplied. There was no system in place
that was prepared for this kind of outcome. And more importantly, no one has
been charged with preventing it. We were facing one of the
largest financial crises in history — and those responsible for oversight were mostly caught off guard and without the authority needed to address the problem. It’s time for that to change. I am proposing that the Federal
Reserve be granted new authority — and accountability —
for regulating bank holding companies and other large firms that pose a risk to the entire economy in the event of failure. We’ll also raise the standard to
which these kinds of firms are held. If you can pose a great risk,
that means you have a great responsibility. We will require these firms
to meet stronger capital and liquidity requirements so that
they’re more resilient and less likely to fail. And even as we place the
authority to regulate these large firms in the hands
of the Federal Reserve — so that lines of responsibility
and accountability are clear — we will also create an oversight
council to bring together regulators from across markets
to coordinate and share information, to identify
gaps in regulation, and to tackle issues that
don’t fit neatly into an organizational chart. We’re going to bring everyone
together to take a broader view — and a longer view — to solve problems in oversight before they can become crises. As part of this effort we’re
proposing the creation of what’s called “resolution authority”
for large and interconnected financial firms so that we’re
not only putting in place safeguards to prevent the
failure of these firms, but also a set of orderly
procedures that will allow us to protect the economy if such a
firm does in fact go underwater. Think about this:
If a bank fails, we have a process through the
FDIC that protects depositors and maintains confidence
in the banking system. This process was created during
the Great Depression when the failure of one bank led
to runs on other banks, which in turn threatened
wider turmoil. And it works. Yet we don’t have any effective
system in place to contain the failure of an AIG, or the
largest and most interconnected financial firms in our country. And that’s why, when
this crisis began, crucial decisions about what
would happen to some of the world’s biggest companies — companies employing tens of thousands of people and holding trillions of dollars in assets — took place in emergency meetings in the middle of the night. And that’s why we’ve had to
rely on taxpayer dollars. We should not be forced to
choose between allowing a company to fall into a rapid
and chaotic dissolution, or to support the company
with taxpayer money. That’s an unacceptable choice. There’s too much at stake,
and we’re going to change it. Second, we’re proposing a new
and powerful agency charged with just one job: looking out
for ordinary consumers. And this is essential, for this
crisis was not just the result of decisions made by the
mightiest of financial firms; it was also the result of
decisions made by ordinary Americans to open credit cards
and take out home loans and take on other financial obligations. We know that there were many who
took out loans they knew they couldn’t afford, but there were
also millions of Americans who signed contracts they didn’t
always understand offered by lenders who didn’t
always tell the truth. Even today, folks sign up for
mortgages or student loans or credit cards and face
a bewildering array of incomprehensible options. Companies compete not by
offering better products, but more complicated ones, with
more fine print and more hidden terms. So this new agency
will change that, building on credit card reforms
I signed into law a few weeks ago with the help of many of the
members of Congress who are here today. This agency will have the
power to set standards so that companies compete by offering
innovative products that consumers actually want —
and actually understand. Consumers will be provided
information that is simple, transparent, and accurate. You’ll be able to compare
products and see what’s best for you. The most unfair
practices will be banned. Those ridiculous contracts with
pages of fine print that no one can figure out — those things will be a thing of the past. And enforcement will be the
rule, not the exception. For example, this agency will be
empowered to set new rules for home mortgage lending, so that
the bad practices that led to the home mortgage crisis
will be stamped out. Mortgage brokers will be
held to higher standards. Exotic mortgages that hide
exploding costs will no longer be the norm. Home mortgage disclosures will
be reasonable, clearly written, and concise. And we’re going to level the
playing field so that non-banks that offer home loans are held
to the same standards as banks that offer similar services, so
that lenders aren’t competing to lower standards, but rather are
competing to meet a higher bar on behalf of consumers. The mission of this new agency
must also be reflected in the work we do throughout
the government. There are other agencies, like
the Federal Trade Commission, charged with
protecting consumers, and we must ensure that those
agencies have the resources and the state-of-the-art tools
to stop unfair and deceptive practices as well. Third, we’re proposing a series
of changes designed to promote free and fair markets by closing
gaps and overlaps in our regulatory system — including gaps that exist not just within but between nations. We’ve seen that structural
deficiencies allow some companies to shop for the
regulator of their choice — and others, like hedge funds,
to operate outside of the regulatory system altogether. We’ve seen the development
of financial instruments, like many derivatives, that are
so complex as to defy efforts to assess their actual value. And we’ve seen a system that
allowed lenders to profit by providing loans to borrowers
who would never repay, because the lender offloaded the
loans and the consequences to somebody else. And that’s why, as
part of these reforms, we will dismantle the Office of
Thrift Supervision and close loopholes that have allowed
important institutions to cherry-pick among banking rules. We will offer only one
federal banking charter, regulated by a strengthened
federal supervisor. We’ll raise capital requirements
for all depository institutions. Hedge fund advisors will be
required to register with the SEC. We’re also proposing
comprehensive regulation of credit default swaps and other
derivatives that have threatened the entire financial system. And we will require the
originator of a loan to retain an economic interest in that
loan, so that the lender — and not just the holder of
a security, for example — has an interest in ensuring that
a loan is actually paid back. By setting common-sense rules,
these kinds of financial instruments can
play a constructive, rather than destructive role. Over the past two decades,
we’ve seen time and again, cycles of precipitous
booms and busts. In each case, millions of people
have had their lives profoundly disrupted by developments
in the financial system, most severely in
our recent crisis. These aren’t just
numbers on a ledger. This is a child’s chance
to get an education. This is a family’s ability to
pay their bills or stay in their homes. This is the right of our seniors
to retire with dignity and security and respect. These are American dreams, and
we should not accept a system that consistently
puts them in danger. Financial institutions have an
obligation to themselves and to the public to manage
risk carefully. And as President, I have a
responsibility to ensure that our financial system works
for the economy as a whole. There’s always been a tension
between those who place their faith in the invisible hand of
the marketplace and those who place more trust in the guiding
hand of the government — and that tension
isn’t a bad thing. It gives rise to healthy debates
and creates a dynamism that makes it possible for
us to adapt and grow. For we know that markets are not
an unalloyed force for either good or for ill. In many ways, our financial
system reflects us. In the aggregate of countless
independent decisions, we see the potential
for creativity — and the potential for abuse. We see the capacity for
innovations that make our economy stronger — and for innovations that exploit our economy’s weaknesses. We are called upon to put in
place those reforms that allow our best qualities
to flourish — while keeping those
worst traits in check. We’re called upon to recognize
that the free market is the most powerful generative force
for our prosperity — but it is not a free license to
ignore the consequences of our actions. This is a difficult
time for our nation. But from this
period of challenge, we can once again tap those
values and ideals that have allowed us to lead
the global economy, and will allow us
to lead once again. That’s how we’ll help more
Americans live their own dreams. That’s why these reforms
are so important. And I look forward to working
with leaders in Congress and all of you to see these proposals
put to work so that we can overcome this crisis and
build a lasting foundation for prosperity. Thank you very much, everybody. Thank you. (applause)